If the ice cream industry is a competitive price-taker market and all ice cream producers are earning zero economic profit, what will be the impact of an increase in the demand for ice cream?
A) Firms will exit the ice cream industry in the long run since they are earning zero economic profit.
B) The firms will now be able to earn long-run economic profit assuming that barriers to entry remain low and new firms can enter the market.
C) A shortage of ice cream will develop.
D) The price of ice cream will rise initially, inducing the existing firms to expand output and new firms to enter the industry.

Question

Quizplus · Accepted Answer

An increase in demand will initially raise prices, leading existing firms to expand output and attracting new firms, restoring zero economic profit in the long run.

If the Ice Cream Industry Is a Competitive Price-Taker Market